Whether you are starting a new business or expanding an existing one, you need funds to get things moving. One of the most reliable and highly recommended sources of loans for small businesses is the U.S. Small Business Administration (SBA).
SBA is a federal agency dedicated to assisting small entrepreneurs improve their small businesses, make the most of contracting opportunities, and gain greater access to small business loans.
A common misconception about SBA is that it lends money directly to the small businesses. In reality, businesses get an SBA loan from a bank that participates in SBA financing. SBA guarantees a percentage of those loans to the banks, so financial institutions have more reasons to lend money to businesses.
It is this guarantee that induces more banks to lend businesses money even if they don’t fit the credit criteria. It is still worth noting that procuring an SBA loan is a lengthy and complex process at several banks.
Nevertheless, as most small businesses desire an SBA loan, it is quite useful to know what steps you have to complete to apply for one.
Here’s all the information you need to make the application process simpler.
The SBA Bank Loan Process
Learn About the Different Loan Types
Before you begin with the application process, find out about the various loan types operated by SBA. There are four primary options available to you: The 7a General Small Business Loan, The 7a SBA Express, The CDC/504 Real Estate and Equipment Loan, and Disaster Loans.
Among these, the 7a General Small Business Loan is appropriate for most businesses. You may use the loan to purchase a franchise, buy equipment, acquire business, and more.
The 7a Express Loans are quite similar to the standard 7a loans, but offer a faster application process.
The CDC/504 Real Estate and Equipment Loan is a specialized form of the SBA loan, aimed at facilitating large capital investments.
Finally, the Disaster Loans — as the name suggests — are targeted at businesses damaged by a disaster in a disaster area.
The standard 7a loan is the most popular type of SBA loan, followed by the CDC/504 loans.
Determine Your Eligibility
The first thing you need to do is find out whether or not your business is eligible for a loan program. You may talk to an SBA officer at a bank to review the various programs and determine which one fits your requirements.
There are different eligibility criteria for the various small business loan programs. For the 7a Loan Program, your business should operate for profit, be small as defined by SBA, have reasonable equity, and be able to show a need for the loan proceed, among others.
You can take a look at the eligibility requirements here.
Choose a SBA Bank
The next step is to find a bank that will disburse and service your loan. If you’re not too sure about this, you may visit this page here to find local SBA lenders, and sort them on the basis of proximity or loan volume.
When you visit banks, you should find out their total SBA loan volume and also if they participate in the SBA Preferred Lender Program.
It’s always recommended to find a bank that deals regularly with SBA loans as they are more likely to have a proper application process in place. You must try and find out information about their SBA interest rates as well.
Organize All Your Paperwork
Once you have a received formal proposal from the bank you’ve chosen, you should quickly get all your paperwork done.
You must remember that SBA has a rather comprehensive document checklist, which you can find here. Some of the main documents include:
• Business Financials
• Projected Financials
• Business Profile
• Tax Returns
• Loan Application History
• Business Lease
In addition to all the important documents, SBA expects you to provide a simple and direct cover letter that clearly explains who you are, what your business background is, and the nature of your business, the amount and purpose of your loan request, your requested terms of repayment, how the funds will benefit your business, and how you will repay it.
If you complete the documentation process correctly, chances of your loan getting approved quickly increase. A good tip is to start assembling all the documents early, so that you don’t waste precious time.
It’s also a wise idea to seek the loan officer’s help. Make sure you double check all the documents you are submitting and get all your queries answered by the loan officer, who has both experience and expertise to guide you in the right direction.
Fill Out the SBA Forms
The next step is to fill out all the necessary SBA forms. These are: Form 4: Application for Business Loan, Exhibit A: Schedule of Collateral, Form 912: Statement of Personal History, Form 413: Personal Financial Statement, and Form 159 (7a): Fee Disclosure Form and Compensation Agreement.
Once you have filled out all the forms and organized your paperwork, you need to meet with the bank to finalize your application. This is the underwriting stage in which your bank will thoroughly analyze all the information you have provided to approve or decline your application. Usually, this process takes about 1-2 weeks.
At this stage, you should be proactive while clarifying doubts or asking questions. Specifically, you should check time frames and closing requirements.
SBA Bank Loan Process in a Nutshell
Here’s a quick summary of how a typical loan process tends to go:
• Pre-qualification: Initial information to determine whether or not you meet the bank’s general criteria
• Proposal: If you pre-qualify, your bank will offer you a proposal
• Underwriting: If you accept the proposal, you will enter the underwriting stage
• Closing: Loan terms are finalized and signed
While it’s true that applying for an SBA loan is both a time-consuming and complex affair, you can save both time and money by getting yourself organized. Before you approach a bank, be clear on what exactly you are looking for. It is then a matter of ticking all the boxes to get your loan approved on time.
Image: U.S. Small Business Adminstration